So, should investors chase the Fed in this product category?
“Since we don’t know the timing of the Fed’s actions, I think investors should look at this as a way to provide stability to investments they already may have had exposure to, or to areas they may want to rebalance back into in an effort to remain diversified away from U.S. equities,” Rosenbluth says.
And, he adds, investors need to be careful to not overpay for these products.
The share price of many leading bond ETFs traded at discounts to their respective net asset value just two weeks ago. LQD, for example, traded at a 5% discount to its NAV, according to Rosenbluth. As of Friday, it traded at a premium of 1.6%.
Given that the Fed said it won’t pay a substantial premium to NAV, investors should be careful to do the same.
Of course, Fed purchases of individual investment-grade corporate bonds and ETFs that invest in them will drive down yields on these securities.
“The Fed is buying because demand for these bonds has been low,” Rosenbluth says. “So we’ll likely return to where yields were three weeks ago before people stopped buying and the yields went up.”
Indeed, Moody’s Seasoned Aaa Corporate Bond Yield hit a year-to-date low of 2.36% on March 6 before zooming to 4.12% on March 20. It immediately retreated after the Fed announced it will become a buyer of investment-grade corporate bonds, and ended the week at 3.07%.
Another thing for investors to consider is the potential outcome for prices and yields when the Fed decides to sell its bond ETFs.
“If the only reason investors are considering buying these ETFs is because the Fed has their back, keep in mind the Fed won’t be a buy-and-hold investor,” Rosenbluth says. “The Fed will likely hold it for the longer term to provide stability, but yes, at some point the Fed will likely scale out of a position.”